Australia’s Rates Hit 4.85%

Australia's fight against inflation is putting growing pressure on its economy.

Mortgage costs are climbing, housing prices are falling, and unemployment is expected to rise. Yet with consumer prices still proving difficult to contain, the Reserve Bank of Australia (RBA) has chosen to tighten monetary policy once again.

Inflation May Not Ease Until Late 2027

The RBA expects inflation to stay above 3% over the next year, with a return to the upper end of its 2–3% target range unlikely until late 2027. Much of the pressure comes from rising fuel and commodity prices linked partly to the Middle East conflict. Strong demand for AI-related technology products, combined with limited production capacity, has also pushed business costs higher. As companies pass these expenses on to customers, policymakers are concerned that persistent price increases could influence future wage demands and pricing decisions.

A Fifth Rate Hike Despite Economic Weakness

Against this backdrop, the RBA increased its benchmark interest rate by 25 basis points to 4.85%, the highest since late 2008 and its fifth hike of 2026.

The decision passed by a 6–3 vote, with three board members preferring to hold rates steady. The disagreement reflects concerns about the economic consequences of further tightening, particularly as higher borrowing costs reduce household spending and business investment. Housing prices have already declined significantly, economic growth is expected to slow, and the central bank has revised its unemployment projections upward.

How Much More Can the Economy Absorb?

The RBA's next decision will depend on how quickly inflation responds to higher rates and how much further economic conditions weaken. Another increase remains possible if price pressures persist, but rising unemployment and weaker consumption could make additional tightening harder to justify. Upcoming inflation, employment and spending figures will help determine how long borrowing costs remain at their highest level in nearly 18 years.